Legal Considerations
in Responsible Investment

On Wednesday, March 6, 2024, two years after the SEC first introduced its climate disclosure standards for reporting companies, the SEC adopted the final version of its climate change disclosure rule. The rule requires robust disclosures relating to registrants’ climate-related activities and risks, and phase-in will begin in 2025, with full compliance required by all filers by 2033.

The SEC first introduced its proposed climate disclosure rules on March 21, 2022, as discussed by the ESG Institute in a prior post. Two months later, on May 25, 2022, the SEC voted 3-1 in favor of the proposed rule, as discussed in a separate ESG Institute post. After reviewing thousands of public comments by interested institutions and individuals, including the ESG Institute, the SEC conducted its final vote on the proposed rule on March 6, 2024. The commission voted 3-2 in favor of the disclosures, which, according to the SEC, will “require a registrant to disclose, among other things: material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition” (the “Rule”).

The Rule largely tracks the earlier “proposed” versions, but materially differs in two important respects that investors should note. First, after considerable debate over the past few years, the final version of the Rule only requires that registrants disclose Scope 1 and Scope 2 greenhouse gas (“GHG”) emissions. Scope 1 refers to the registrants’ direct GHG emissions, and Scope 2 refers to the registrants’ emissions from purchased power sources. Scope 3 GHG emissions, in contrast, result from registrants’ downstream and upstream supply and production chains, and were viewed as the most controversial of the three emission categories. The requirement to disclose Scope 3 GHG emissions was removed most likely in an effort to protect the Rule from legal challenges.

Second, the Rule creates a safe harbor from challenges by investors under the federal securities laws for particular climate-related disclosures “pertaining to a registrant’s transition plan, scenario analysis, internal carbon pricing, and targets and goals.” The Rule carves out historic facts from this safe harbor. In practice, it is likely that the safe harbor will do nothing more to insulate statements from liability than the PSLRA’s forward-looking statement safe harbor already does.

SEC Chair Gary Gensler noted that the Rule “will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements.” Conversely, the two commissioners who voted against the Rule opined that the SEC lacked the proper authority to enact such a rule absent express congressional approval. To date, companies have been able to greenwash their climate-related risk and activity disclosures in sustainability reports. Now, with the weight of the federal securities laws acting as a check on these disclosures, companies will be held to a higher standard, and investors can expect more accurate reporting.

The Rule is one of most important regulations the SEC has passed in decades to ensure that registrants accurately portray themselves to investors. It faces challenges, however. Attorney generals from ten states have filed a petition in the Eleventh Circuit seeking for that court to review the Rule as exceeding the SEC’s authority. Other challenges may come from groups who believe the Scope 3 emissions disclosures should not have been scuttled. The ESG Institute will monitor these challenges closely.

The Rule will go into effect 60 days after publication in the Federal Register. Thereafter, reporting companies will begin adopting the Rule in accordance with a “phase-in period” schedule – a compliance period dependent on the registrant’s filing status. Large filers (as defined by the SEC, those whose public float exceeds $700 million) will be required to comply with the Rule by 2025, and all filers must be in compliance with the Rule by 2033.

The final Rule can be accessed here. An SEC fact sheet which highlights key components and practical implications of the Rule can be accessed here.